Professional November 2016

PAYROLL INSIGHT

Samantha Mann MCIPPdip, CIPP senior policy and research officer, reviews the consultation proposals to reform the rules Simplifying the PSA process

A s announced in the 2016 working hard to gain a far greater view and wider understanding of the issues relating to moving employee Class 1 National Insurance contributions (NICs) to an annual, aggregate and cumulative basis, whilst at the same time considering an alternative to employer NICs – a payroll levy – maybe? In the meantime, what of Class 1B NICs which is payable by the employer only on expenses and benefits agreed within a pay as you earn (PAYE) settlement agreement (PSA)? A consultation paper (http://bit. ly/2cQja9R), which was published on 9 August 2016, gives details of how HM Revenue & Customs (HMRC) plans to streamline the PSA process following the recommendations of the OTS. The consultation closed on 18 October 2016. The OTS, though acknowledging the financial implications to the Exchequer and the Department for Work and Pensions, has recommended widening the scope of PSAs to allow any item to be included; after all, if an employer wants to meet the liability of the employee why shouldn’t they be allowed to? However, though HMRC is not proposing to broaden the scope of what can be included, it has promised to keep this under review. At present the PSA works only as a result of some significant manual processes by both the employer and HMRC. Setting aside the approval process, the employer then goes on to submit a calculation to HMRC by the Budget, the team of The Office of Tax Simplification (OTS) is

Proposals Although annual agreement is a key part of the PSA process and provides the employer with reassurance and certainty, it is felt to be unnecessarily burdensome and therefore a prime area for updating – possibly even with a digital replacement, which is likely to need to include the following detail: ● the different BiKs/expenses provided ● the value of each BiK/expense ● number of employees who received each BiK/expense ● the number of employees across each tax band (including Scottish rates where appropriate) ● combined total of grossed up tax on BiKs/expenses, and ● Class 1B NICs value. Digital replacement could justify alignment of the current October deadline with the existing 6 July deadline for P11D returns along with 19/22 July deadlines for payments. Removing the approval process will require the employer community to have a greater understanding of the consequences in the event an item reported in the PSA is subsequently rejected by HMRC. Though the consultation paper invites views on this it proposes a pragmatic view where the item is included ‘in good faith’ of a ‘first time warning’ with HMRC looking to take action only in the event of repetition in subsequent years. Cash payments or cash reimbursement and contractual BiKs will remain unsuitable for including in a PSA, regardless of their value or frequency provided. The consultation paper questions

end of July (following the end of the tax year in which the benefits in kind (BiKs) were provided) which includes information about the BiKs, their value and the total number of employees who receive the items along with their marginal tax rates. Each PSA calculation is checked manually to ensure that the calculation includes all items which were included in the signed agreement. Once checked and agreed the employer has until 19 or 22 of October to settle their PSA liability, which will also include the Class 1B NICs payment. ...recommended widening the scope of PSAs to allow any item to be included... HMRC send a payslip – bearing a reference number which is not the same as the employer’s PAYE or Accounts Office reference numbers – to the employer enabling the PSA payment for the relevant tax year. This number must be used as otherwise the payment will be misallocated and not settle the PSA amount. This process is currently at odds with HMRC’s normal risk-based approach to compliance. It is also at odds with the changes that were introduced in April 2016, when the dispensation process was replaced with the statutory exemption for paid or reimbursed expenses.

| Professional in Payroll, Pensions and Reward | November 2016 | Issue 25 20

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